Funding Agricultural Consolidation

What started off as challenge in land consolidation is fast becoming an attractive financial investment. Agricultural land funds are turning Bulgaria's inefficiently small rural land plots into bigger and more manageable farms for later leasing to agricultural operators. As domestic and international investors become increasingly interested, agricultural land prices are going up and the farming business is set to get a boost.

Land dispersion has been an issue in the country since the fall of communism. The agricultural land market has been paralysed; mostly due to the fact that plots were excessively divided and dispersed. With plots often less than one hectare in size and ownership randomly distributed, farmers who want to expand production have had to negotiate with an array of owners in various locations. This has had an impact in the amount of foreign investment directed at the Bulgarian agricultural sector.

Now however, land consolidation is bringing new players to Bulgarian agribusiness. "We are seeing a change", Veselin Petrov, executive director of Elana Property Management, told OBG. "We have been approached by the Danish association of farmers; we have been approached by Greek, Turkish and English farmers wanting to rent land here."

Elana was the first to establish an agricultural land fund, in 2005. The company's Agricultural Land Opportunity Fund currently holds a farmland portfolio with 25,330 ha at an average acquisition cost of 1038 euro per hectare. The company has a capital of 47.4m euro and plans to extend its ownership to 37,000 ha by the end of this year.

Five funds - financial services provider Karoll's Advance TerraFund, Agrofinance, FNI Bulgaria and Bulland Investments - together own and manage some 60,000 ha of Bulgaria's estimated 3m ha of arable land, according to local media.

Although the buying and consolidating of Bulgaria's agricultural plots has been pushing prices up, arable land is still relatively cheap compared to other European countries. The price of agricultural land in Bulgaria is almost a tenth of Greece's 10,500 euros per hectare and almost 30 times lower than in the Netherlands, where the average price of agricultural land is 29,000 euros per hectare, according to figures provided by Karoll.

Prices are set to rise in the near future, as foreign investors try to cash in on the affordable land. However, Bulgaria's cost advantage will remain considerable for years to come. "I do not believe that land prices in Bulgaria will reach those of Germany, Holland or France, but there will be an increase," said Petrov. "Now the average cost is around 1500 euros per hectare, and I believe that in five years it will reach 3000 euros per hectare."

The rise in foreign interest is set to bring much needed know-how to the Bulgarian agricultural sector, used to operating small plots with rudimentary techniques. This inflow of foreign players is already raising the standard of production. "Some of our fund clients have rented the land and have begun the certification process for organic foods," said Petrov. This could be an appealing new market for Bulgaria, where a large number of farming plots have not been used for decades.

The movement of consolidation, currently being spearheaded by the agricultural funds is bound to take some time though. It will take about five to seven years for significant progress to be made, according to industry insiders. Karoll currently employs 200 agents whose job is to scour the country and buy up land plots, concentrating on certain geographical regions.

The land funds are attracting domestic and international attention and Karoll plans to launch an IPO in June. However, some experts have cautioned that agricultural land funds are overvalued.

"When you acquire dispersed land plots to make bigger plots the price goes up. So these large plots are currently traded at a premium of over 50%," a broker told OBG.